Markets: The RBA's election gift

Tomorrow’s Reserve Bank monetary policy committee meeting is sure to be scrutinised more closely and by a wider audience than usual. That’s because we are in the midst of a federal election.

For 23 years and through nine national election campaigns the central bank has been announcing the cash rate, but it has only changed it once in the lead up to an election, according to Matt Sherwood, the strategist at fund manager Perpetual. That was in 2007 when the Reserve Bank hiked the cash rate and John Howard lost the election to current Prime Minister Kevin Rudd. “The rewards from consistent application of good policies are known… even if not immediate,” Reserve Bank governor Glenn Stevens told a Sydney audience last week.

Sherwood says the central bank is confident enough to cut the cash rate tomorrow. Indeed all signs point to it. Stevens all but confessed there would be another rate cut when he said last week: “the inflation outlook may afford some scope to ease policy further if needed to support demand”.

“The economy desperately needs lower rates,” says Sherwood, who lists a litany of domestic economic ills including weak retail sales, an uptick in unemployment, a lack of robust activity in the industrial sector and weak commodity prices that has led to a slowdown in mining activity. “All the boxes are ticked for a rate cut,” he says.

Certainly the market thinks so. Traders are betting there is a 94 per cent chance the Reserve Bank will cut the cash rate to 2.5 per cent tomorrow and cut again by December, according to Bloomberg data. Traders and analysts say the Reserve Bank wants the Australian currency to fall further. The Australian dollar has slumped 15 per cent since April 11 when it was at $1.0545 against the US dollar. At 0820 AEST the Australian currency was at 89.15 US cents.

A rate cut tomorrow may not influence voters but whoever gains government after September 7 may offer thanks to the Reserve Bank, which is doing its bit to try and keep the economy on course.